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Dividend Record Date Reform: Progress and Challenges
Publication date Dec. 17, 2024
Summary
The dividend record date reform, introduced in January 2023, aims to enhance predictability for investors, bolster global investor confidence, and improve the competitiveness of Korea’s capital markets by determining dividend eligibility and dividend amounts prior to the record date. Although this reform marks a significant step toward increasing market transparency, its effectiveness has been constrained by low adoption rates among companies.
An analysis of the reform adoption and implementation status as of 2024 indicates that only 23.8% of companies listed on the KOSPI and 36.0% of those on the KOSDAQ have revised their dividend policies. The actual implementation of the revised record date practice is even lower. Among KOSPI-listed companies that amended articles of incorporation (AOI), only 50% implemented the new practice, whereas the implementation rate among KOSDAQ-listed companies was a mere 9.5%. In the KOSPI market, a relatively high proportion of large-cap companies (20.3%), which typically attract high levels of investor interest and have a stronger presence, exhibited a relatively higher adoption rate, with 20.3% amending AOI and implementing the revised practice. However, this level of adoption remains insufficient to yield a meaningful impact.
As the fiscal year-end for 2024 approaches, increased engagement from both companies and investors is crucial to drive broader implementation of the revised record date policy. Companies must prioritize adopting the new practice to enhance dividend predictability and investor confidence, while shareholders should actively advocate for changes to dividend policies and push for their improvement. Such coordinated efforts will strengthen the dividend system’s effectiveness, thereby enhancing confidence and competitiveness in Korea’s capital markets.
An analysis of the reform adoption and implementation status as of 2024 indicates that only 23.8% of companies listed on the KOSPI and 36.0% of those on the KOSDAQ have revised their dividend policies. The actual implementation of the revised record date practice is even lower. Among KOSPI-listed companies that amended articles of incorporation (AOI), only 50% implemented the new practice, whereas the implementation rate among KOSDAQ-listed companies was a mere 9.5%. In the KOSPI market, a relatively high proportion of large-cap companies (20.3%), which typically attract high levels of investor interest and have a stronger presence, exhibited a relatively higher adoption rate, with 20.3% amending AOI and implementing the revised practice. However, this level of adoption remains insufficient to yield a meaningful impact.
As the fiscal year-end for 2024 approaches, increased engagement from both companies and investors is crucial to drive broader implementation of the revised record date policy. Companies must prioritize adopting the new practice to enhance dividend predictability and investor confidence, while shareholders should actively advocate for changes to dividend policies and push for their improvement. Such coordinated efforts will strengthen the dividend system’s effectiveness, thereby enhancing confidence and competitiveness in Korea’s capital markets.
Dividend record date reform
The dividend mechanism plays a pivotal role in building trust between companies and their shareholders and ensuring transparency in capital markets. However, under the previous dividend distribution framework, companies were not required to disclose information regarding dividend eligibility and amounts prior to the dividend record date—the cut-off date for determining shareholder entitlements to dividends. This lack of disclosure created uncertainty for investors, adversely affecting their decision-making processes. To address these shortcomings, the Financial Services Commission (FSC) introduced the dividend record date reform in January 2023, mandating that companies confirm and disclose dividend amounts before the dividend record date.1)
The revised framework adopts a “determine dividend amounts first and set the record date later” approach, aiming to provide timely, transparent, and reliable dividend information to establish an investor-centric dividend mechanism. In response to the FSC’s reform, some companies have amended their AOI and adopted new dividend distribution procedures. These changes effectively separate the record date for exercising voting rights from the dividend record date, requiring companies to establish the latter only after dividend amounts are confirmed.
Anticipated benefits of changes to the dividend record date policy
The dividend record date reform is expected to positively impact the market by enhancing the competitiveness of Korea’s capital markets and restoring investor confidence.
First, the reform can improve dividend predictability. As explained earlier, investors will be able to decide whether to invest after dividend-related decisions are finalized. This enables investors to make informed decisions based on clearer and more reliable information, thereby contributing to enhancing corporate transparency and building stronger investor trust.
Second, the revised mechanism brings Korea’s dividend practices closer to global standards. Under the former framework, dividends were determined after the record date, a practice criticized for failing to meet international norms. Morgan Stanley Capital International (MSCI) has cited this failure as a key factor in classifying Korea as an emerging market, repeatedly calling for improvements. By requiring dividend amounts to be confirmed before setting the record date, the new approach aims to gain global investor confidence, address the “Korea Discount”, and attract foreign capital inflows.
Third, dividend record dates were previously concentrated around the fiscal year-end (December 31), resulting in stock price decreases and market index volatility caused by ex-dividend effects. The ex-dividend effect refers to a stock price decline equivalent to the dividend amount paid at a time when the right to dividends expires, which has historically influenced stock trading and introduced unnecessary market fluctuations. This revised framework allows for a more flexible and diversified designation of dividend record dates, enhancing market stability and mitigating volatility.
Current state of dividend policy improvements
As the dividend record date reform relies on voluntary participation rather than mandatory compliance, it is worth examining the extent to which individual companies have adopted these changes.
According to corporate annual reports as of the end of March 2024, 777 out of 2,434 listed companies in Korea (31.9%) have amended their AOI to revise the dividend record date. By market, 194 companies listed on the KOSPI (23.8%) and 583 on the KOSDAQ (36.0%) have adopted the improved dividend procedures. This suggests that KOSDAQ-listed companies have been more proactive in embracing the dividend reform than their KOSPI counterparts (see Table 1).
A quintile analysis based on market capitalization indicates that large-cap companies are more likely to incorporate dividend record date improvements. In the KOSPI market, 35.6% of top-quintile companies amended their AOI, significantly higher than 26.4% in the middle quintile and 15.0% in the bottom quintile (Panel A in Table 1). A similar pattern is observed in the KOSDAQ market, where the top-quintile amendment rate is 41.7%, surpassing even the top-quintile rate in the KOSPI market. This trend suggests that companies with greater market capitalization are more attuned to the demands and expectations of global investors and are therefore more inclined to adopt improved dividend practices to enhance investor trust.
To assess the impact of global investor interest on dividend policy improvements, an analysis is conducted based on the share of foreign investors. In the KOSPI market, the AOI amendment rate among top-quintile companies with the highest share of foreign investors is 31.9%, surpassing the rates for middle- and bottom-quintile companies. In the KOSDAQ market, however, companies with a lower share of foreign investors showed a stronger tendency to amend their AOI, indicating a divergence between the two markets (Panel B in Table 1). This discrepancy may reflect the concentration of foreign investors in large-cap stocks in the KOSPI market, whereas the KOSDAQ market may be more attuned to foreign investors’ focus on the characteristics of individual companies and their domestic investment needs.
In summary, the proportion of companies adopting the revised dividend policy remains between one-quarter and one-third in both the KOSPI and KOSDAQ markets, revealing insufficient implementation of dividend improvements. Notably, the lower adoption rate in the KOSPI market (23.8%) compared to the KOSDAQ market (36.0%) underscores the need for greater engagement among major companies in improving dividend distribution procedures.
Amending AOI paves the way for the regulatory framework for changing the dividend record date mechanism. However, whether this amendment has led to practical improvements requires further investigation. The analysis shows that even after amending AOI, many companies continue to adhere to the traditional practice of deciding shareholder eligibility before dividend amounts are finalized. Out of 564 dividend disclosures in the KOSPI market in 2024, 137 cases pertain to the amendment of AOI. Among these 137 disclosures, only 72 cases—approximately half—are found to have paid dividends in accordance with the amendment (Table 2).
Although the proportion of KOSDAQ-listed companies that have amended AOI is higher compared to their KOSPI counterparts, the practice of setting the record date after dividend amounts are determined has been rarely implemented. Among 612 dividend disclosures in the KOSDAQ market, only 19 cases employed this new practice, resulting in a low implementation rate of only 9.5%. This indicates that many AOI amendments in the KOSDAQ market have not translated into dividend record date improvements (Table 2).
In an analysis based on market capitalization and the share of foreign investors, top-quintile companies in the KOSPI market (top 20%) show a relatively higher rate of adopting the practice of setting the record date after confirming dividend amounts (20.3%), compared to 12.4% for middle-quintile companies and 8.3% for bottom-quintile companies. This implies that companies with greater market capitalization are more proactive in adopting the revised practice. However, even among top-quintile companies, the adoption rate of 20.3% is considered relatively low. In contrast, the KOSDAQ market exhibits no marked differences in adoption rates based on market capitalization. The limited number of KOSDAQ-listed companies implementing the revised record date policy makes it difficult to identify meaningful trends. Furthermore, no clear correlation is observed between the share of foreign investors and the adoption of the revised record date, suggesting that the impact of the share of foreign investors on the implementation of dividend improvements is either limited or offset by other factors, such as market capitalization.
Lastly, market capitalization-weighted stock price volatility is assessed to gauge the ex-dividend effect. Companies that designated December 31, 2023 as their dividend record date (“Year-end dividends (Dec. 31) in Figure 2) experienced a more pronounced decline in stock prices due to the ex-dividend effect, compared to companies that designated other record dates (“Interim dividends” (Dec. 31 excluded) in Figure 2) or those that did not distribute dividends (“No dividend payment” in Figure 2). Specifically, companies with a December 31 record date saw an average stock price drop of 42.8 basis points (bp) on the ex-dividend date, whereas those with record dates other than December 31 and those without dividend payments recorded modest declines of 18.1bp and 17.3bp, respectively. It is also noteworthy that companies designating December 31 as the record date accounted for 61% of the total KOSPI market capitalization, underscoring the widespread impact of the ex-dividend effect on the entire market. This emphasizes the need for broad adoption of the revised record date practice.
In the KOSDAQ market, the ex-dividend effect for companies with a December 31 record date was modest at 10.7bp, notably lower than the impact observed in the KOSPI market. Particularly, companies that set record dates other than December 31 or did not distribute dividends even experienced stock price increases, suggesting that the impact of record date decisions on stock price volatility is less pronounced in the KOSDAQ market.
These findings indicate that the concentration of record dates in December 31 significantly exacerbates stock price volatility across the market. Encouraging more companies to adopt the revised dividend record date practice could help diversify record dates, thereby alleviating the heightened price declines for certain dates driven by ex-dividend effects. This shift would contribute to a more stable investment environment and enhance investor trust in Korea’s capital markets.
Future challenges
The reform of dividend record dates marks a pivotal milestone in enhancing the transparency and reliability of Korea’s capital markets. Although some companies have amended their AOI to reflect the improved process, the limited incorporation of these improvements into actual dividend distribution practices has constrained the reform’s effectiveness. Broader corporate participation and a commitment to implementing the revised practice are required to fully realize the benefits of this reform.
For the new record date practice to be established, companies should actively embrace dividend improvements to enhance transparency in dividend policies and build global investor confidence. Shareholder interest and demands will play a crucial role in driving the widespread adoption of the new practice. Investors should closely scrutinize companies’ dividend policies and monitor changes to record dates, while consistently advocating for transparency and fairness. Such active investor engagement can help encourage companies to take responsibility for improving their dividend practices.
As the 2024 fiscal year draws to a close, the dividend record date practice is expected to have a significant impact on the market once again. Through the active adoption of the revised practice, the anticipated benefits of the reform, such as improved predictability of dividend payouts, greater convenience for global investors, and reduced market volatility, can be fully achieved. This shift will provide a critical opportunity to further advance Korea’s capital markets.
1) Financial Services Commission (January 31, 2023), Hwang, H.Y. (2023).
References
Financial Services Commission, January 31, 2023, Initiatives to align Korea’s dividend distribution procedures to global standards, press release.
Hwang, H.Y., 2023, Plans for regulatory improvement towards reasonable dividend policy, Korea Capital Market Institute Issue Papers 23-09.
The dividend mechanism plays a pivotal role in building trust between companies and their shareholders and ensuring transparency in capital markets. However, under the previous dividend distribution framework, companies were not required to disclose information regarding dividend eligibility and amounts prior to the dividend record date—the cut-off date for determining shareholder entitlements to dividends. This lack of disclosure created uncertainty for investors, adversely affecting their decision-making processes. To address these shortcomings, the Financial Services Commission (FSC) introduced the dividend record date reform in January 2023, mandating that companies confirm and disclose dividend amounts before the dividend record date.1)
The revised framework adopts a “determine dividend amounts first and set the record date later” approach, aiming to provide timely, transparent, and reliable dividend information to establish an investor-centric dividend mechanism. In response to the FSC’s reform, some companies have amended their AOI and adopted new dividend distribution procedures. These changes effectively separate the record date for exercising voting rights from the dividend record date, requiring companies to establish the latter only after dividend amounts are confirmed.
The dividend record date reform is expected to positively impact the market by enhancing the competitiveness of Korea’s capital markets and restoring investor confidence.
First, the reform can improve dividend predictability. As explained earlier, investors will be able to decide whether to invest after dividend-related decisions are finalized. This enables investors to make informed decisions based on clearer and more reliable information, thereby contributing to enhancing corporate transparency and building stronger investor trust.
Second, the revised mechanism brings Korea’s dividend practices closer to global standards. Under the former framework, dividends were determined after the record date, a practice criticized for failing to meet international norms. Morgan Stanley Capital International (MSCI) has cited this failure as a key factor in classifying Korea as an emerging market, repeatedly calling for improvements. By requiring dividend amounts to be confirmed before setting the record date, the new approach aims to gain global investor confidence, address the “Korea Discount”, and attract foreign capital inflows.
Third, dividend record dates were previously concentrated around the fiscal year-end (December 31), resulting in stock price decreases and market index volatility caused by ex-dividend effects. The ex-dividend effect refers to a stock price decline equivalent to the dividend amount paid at a time when the right to dividends expires, which has historically influenced stock trading and introduced unnecessary market fluctuations. This revised framework allows for a more flexible and diversified designation of dividend record dates, enhancing market stability and mitigating volatility.
Current state of dividend policy improvements
As the dividend record date reform relies on voluntary participation rather than mandatory compliance, it is worth examining the extent to which individual companies have adopted these changes.
A quintile analysis based on market capitalization indicates that large-cap companies are more likely to incorporate dividend record date improvements. In the KOSPI market, 35.6% of top-quintile companies amended their AOI, significantly higher than 26.4% in the middle quintile and 15.0% in the bottom quintile (Panel A in Table 1). A similar pattern is observed in the KOSDAQ market, where the top-quintile amendment rate is 41.7%, surpassing even the top-quintile rate in the KOSPI market. This trend suggests that companies with greater market capitalization are more attuned to the demands and expectations of global investors and are therefore more inclined to adopt improved dividend practices to enhance investor trust.
To assess the impact of global investor interest on dividend policy improvements, an analysis is conducted based on the share of foreign investors. In the KOSPI market, the AOI amendment rate among top-quintile companies with the highest share of foreign investors is 31.9%, surpassing the rates for middle- and bottom-quintile companies. In the KOSDAQ market, however, companies with a lower share of foreign investors showed a stronger tendency to amend their AOI, indicating a divergence between the two markets (Panel B in Table 1). This discrepancy may reflect the concentration of foreign investors in large-cap stocks in the KOSPI market, whereas the KOSDAQ market may be more attuned to foreign investors’ focus on the characteristics of individual companies and their domestic investment needs.
In summary, the proportion of companies adopting the revised dividend policy remains between one-quarter and one-third in both the KOSPI and KOSDAQ markets, revealing insufficient implementation of dividend improvements. Notably, the lower adoption rate in the KOSPI market (23.8%) compared to the KOSDAQ market (36.0%) underscores the need for greater engagement among major companies in improving dividend distribution procedures.
Although the proportion of KOSDAQ-listed companies that have amended AOI is higher compared to their KOSPI counterparts, the practice of setting the record date after dividend amounts are determined has been rarely implemented. Among 612 dividend disclosures in the KOSDAQ market, only 19 cases employed this new practice, resulting in a low implementation rate of only 9.5%. This indicates that many AOI amendments in the KOSDAQ market have not translated into dividend record date improvements (Table 2).
In the KOSDAQ market, the ex-dividend effect for companies with a December 31 record date was modest at 10.7bp, notably lower than the impact observed in the KOSPI market. Particularly, companies that set record dates other than December 31 or did not distribute dividends even experienced stock price increases, suggesting that the impact of record date decisions on stock price volatility is less pronounced in the KOSDAQ market.
These findings indicate that the concentration of record dates in December 31 significantly exacerbates stock price volatility across the market. Encouraging more companies to adopt the revised dividend record date practice could help diversify record dates, thereby alleviating the heightened price declines for certain dates driven by ex-dividend effects. This shift would contribute to a more stable investment environment and enhance investor trust in Korea’s capital markets.
Future challenges
The reform of dividend record dates marks a pivotal milestone in enhancing the transparency and reliability of Korea’s capital markets. Although some companies have amended their AOI to reflect the improved process, the limited incorporation of these improvements into actual dividend distribution practices has constrained the reform’s effectiveness. Broader corporate participation and a commitment to implementing the revised practice are required to fully realize the benefits of this reform.
For the new record date practice to be established, companies should actively embrace dividend improvements to enhance transparency in dividend policies and build global investor confidence. Shareholder interest and demands will play a crucial role in driving the widespread adoption of the new practice. Investors should closely scrutinize companies’ dividend policies and monitor changes to record dates, while consistently advocating for transparency and fairness. Such active investor engagement can help encourage companies to take responsibility for improving their dividend practices.
As the 2024 fiscal year draws to a close, the dividend record date practice is expected to have a significant impact on the market once again. Through the active adoption of the revised practice, the anticipated benefits of the reform, such as improved predictability of dividend payouts, greater convenience for global investors, and reduced market volatility, can be fully achieved. This shift will provide a critical opportunity to further advance Korea’s capital markets.
1) Financial Services Commission (January 31, 2023), Hwang, H.Y. (2023).
References
Financial Services Commission, January 31, 2023, Initiatives to align Korea’s dividend distribution procedures to global standards, press release.
Hwang, H.Y., 2023, Plans for regulatory improvement towards reasonable dividend policy, Korea Capital Market Institute Issue Papers 23-09.